Finward Bancorp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Summary Finward Bancorp (the “Company”) is a financial holding company registered with the Board of Governors of the Federal Reserve System. Peoples Bank (“the Bank”), an Indiana commercial bank, is a wholly-owned subsidiary of the Company. The Company has no other business activity other than being a holding company for the Bank. The following management’s discussion and analysis presents information concerning our financial condition as of September 30, 2025 and December 31, 2024, and the results of operations for the three and nine months ending September 30, 2025 and September 30, 2024. This discussion should be read in conjunction with the condensed consolidated financial statements and other financial data presented elsewhere herein and with the condensed consolidated financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2024. At September 30, 2025, the Company had total assets of $2.1 billion, loans receivable, net of deferred fees and costs, of $1.5 billion and total deposits of $1.8 billion. Stockholders' equity totaled $165.5 million or 8.1% of total assets, with a book value per share of $38.24. Net income for the three months ended September 30, 2025, was $3.5 million, or $0.81 earnings per diluted common share. For the three months ended September 30, 2025, the return on average assets (ROA) was 0.68%, while the return on average stockholders’ equity (ROE) was 8.96%. Net income for the nine months ended September 30, 2025, was $6.1 million, or $1.42 earnings per diluted common share. For the nine months ended September 30, 2025, the ROA was 0.40%, while the ROE was 5.27%. Recent Developments Regarding the Company and the Bank On July 4, 2025, President Trump signed into law the legislation commonly referred to as the One Big Beautiful Bill Act (“OBBBA”), which is a sweeping federal reconciliation package that permanently extends and expands key provisions of the 2017 Tax Cuts and Jobs Act, introduces new tax benefits (including elevated standard deductions, higher state-and-local tax (SALT) caps, and no taxation on tips and overtime income for certain workers), and enacts broad reductions in government spending. The OBBBA is a complex revision to the U.S. federal income tax laws with potentially far-reaching consequences. The OBBBA will require subsequent rulemaking in a number of areas. The long-term impact of the OBBBA on the Company, the Bank, our shareholders, and the banking industry in general cannot be reliably predicted at this early stage of the new law’s implementation. Shareholders are urged to consult with their own tax advisors regarding the impact of the OBBBA to them and their acquisition, ownership, and disposition of the Company's common stock. The Company's management continues to evaluate the impact of the OBBBA on the Company, the Bank, and its business, financial condition, and results of operations. Termination of Consent Order On August 6, 2025, the FDIC and the Indiana Department of Financial Institutions ("DFI") terminated the Consent Order issued to the Bank that was effective on November 7, 2023 relating to the Bank's compliance with the Bank Secrecy Act and its implementing regulations (collectively, the "BSA"). The termination of the Consent Order follows the Bank's successful resolution of the deficiencies in the Bank's BSA compliance and anti-money laundering compliance program which was the subject of the Consent Order. Memorandum of Understanding On August 9, 2024, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and DFI. The MOU is an informal administrative agreement pursuant to which the Bank has agreed to take various actions and comply with certain requirements to enhance certain areas of the Bank’s operations. The MOU documents an understanding among the Bank, the FDIC, and DFI that, among other things, the Bank will: refrain from paying cash dividends without prior regulatory approval and develop and implement certain plans regarding the Bank’s operations, capital, and strategy. The Bank will submit written quarterly progress reports to the FDIC and DFI detailing compliance with the MOU. The MOU will remain in effect until modified or terminated by the FDIC and DFI. Management does not expect the actions called for by these regulatory actions to have a substantial impact on the Company’s or the Bank’s ongoing day-to-day operations, although they may have the effect of limiting or delaying the Bancorp’s or the Bank’s ability or plans to expand and engage in business acquisitions. 39 Financial Condition General During the nine months ended September 30, 2025, total assets decreased by $8.0 million (0.39%), with interest-earning assets decreasing by $1.6 million (0.08%). At both September 30, 2025 and December 31, 2024, interest-earning assets totaled $1.9 billion. Earning assets represented 92.6% of total assets at September 30, 2025 and 92.3% December 31, 2024. Loan Portfolio Loans receivable, net of deferred fees and costs totaled $1.5 billion at both September 30, 2025 and December 31, 2024. The loan portfolio, which is the Company’s largest asset, is the primary source of both interest and fee income. The Company’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing. The Company’s end-of-period loan balances were as follows: September 30, 2025 December 31, 2024 (Dollars in thousands) Balance % Loans Balance % Loans Residential real estate $ 450,007 30.6 % $ 467,293 31.0 % Home equity 51,813 3.5 % 49,758 3.3 % Commercial real estate 564,558 38.4 % 551,674 36.6 % Construction and land development 79,678 5.4 % 82,874 5.5 % Multifamily 192,698 13.1 % 212,455 14.1 % Commercial business 96,192 6.5 % 104,246 6.9 % Consumer 348 — % 551 — % Manufactured homes 24,372 1.7 % 26,708 1.8 % Government 12,298 0.8 % 11,024 0.7 % Loans receivable 1,471,964 100.0 % 1,506,583 100.0 % Plus: Net deferred loans origination costs 1,719 2,439 Loan clearing funds 91 (46) Loans receivable, net of deferred fees and costs $ 1,473,774 $ 1,508,976 Adjustable rate loans / loans receivable $ 728,185 49.5 % $ 793,920 52.7 % Our total commercial real estate portfolio (which includes but is not limited to loans secured by office space, medical office space, and mixed-use retail/office space) totaled $564.6 million as of September 30, 2025, compared to $551.7 million as of December 31, 2024. Given prevailing market conditions such as continued elevated interest rate levels, reduced occupancy as a result of the increase in hybrid work arrangements, we are carefully monitoring these loans for signs of deterioration in credit quality. 40 Commercial real estate loans remained our largest loan segment and accounted for 38.4% of the total loan portfolio at September 30, 2025 and 36.6% at December 31, 2024. A further breakdown of the composition of the commercial real estate loan portfolio as of September 30, 2025 and December 31, 2024 is shown in the table below: Commercial Real Estate (CRE) September 30, 2025 December 31, 2024 (Dollars in thousands) # Loans $ Amount % of Total Gross Loans # Loans $ Amount % of Total Gross Loans CRE Owner Occupied (CRE OO) Food services & drinking Places 68 $ 36,584 2.5 % 65 $ 30,481 2.0 % Gasoline stations & fuel dealers 32 30,925 2.1 % 28 28,957 1.9 % Ambulatory health care services 31 26,683 1.8 % 33 28,891 1.9 % Repair and maintenance 37 17,468 1.2 % 34 16,050 1.1 % Specialty trade contractors 31 15,057 1.0 % 31 13,265 0.9 % Merchant wholesalers, durable goods 13 11,251 0.8 % 13 12,332 0.8 % Truck transportation 15 10,850 0.7 % 12 10,350 0.7 % Personal and laundry services 30 9,592 0.7 % 31 10,673 0.7 % Professional, scientific, and technical services 25 10,042 0.7 % 26 10,266 0.7 % Other 196 84,493 5.7 % 195 85,344 5.7 % Total CRE Owner Occupied (CRE OO) 478 $ 252,945 17.2 % 468 $ 246,609 16.4 % CRE Non Owner Occupied (CRE NOO) Strip centers - lessors 167 $ 143,540 9.8 % 165 $ 140,360 9.3 % Hotels 17 46,842 3.2 % 18 48,659 3.2 % Industrial properties - lessors 64 49,576 3.4 % 60 43,581 2.9 % Office properties - lessors 62 42,547 2.9 % 57 38,472 2.6 % Special use - lessors 10 10,589 0.7 % 10 11,527 0.8 % Mini Warehouses - lessors 17 8,149 0.6 % 17 8,011 0.5 % Big box retail - lessors 2 7,931 0.5 % 2 8,201 0.5 % Other 8 2,439 0.2 % 14 6,254 0.4 % Total CRE Non Owner Occupied (CRE NOO) 347 $ 311,613 21.2 % 343 $ 305,065 20.2 % Total Commercial Real Estate (OO & NOO) 825 $ 564,558 38.4 % 811 $ 551,674 36.6 % Total Gross Loans $ 1,471,964 $ 1,506,583 The Bank’s Appraisal Policy and Procedures is Board approved annually and reflects current regulatory guidelines and recommendations. As one of the primary factors in commercial loan underwriting is the quality of the asset being pledged as collateral, it is imperative that the appraisal process receive appropriate attention. Appraisals must be prepared in accordance with high professional standards, by appraisers who have the necessary training, experience and knowledge for them to provide an accurate estimate of value. With few exceptions, appraisals are assigned to fee appraisers named in the Board approved appraiser list, which includes the tracking of all required certifications, licenses and insurance. The Bank has engaged with one of the nation’s longest-standing third-party appraisal management companies for ordering, management, fulfillment and review of real estate appraisals and other valuation-related services for the properties securing the Bank’s commercial real estate loans. Criteria that may require the Bank to obtain a new appraisal or update the existing value for an existing credit include but are not limited to a change in the discount or capitalization rates for a particular location or property type; occupancy or absorption levels; market trends; and/or expense structure. Regarding the necessity of updated valuations for construction financing, factors considered are material changes in construction delays; cost overruns; or reductions in sales prices/rents. This may be done as a part of a renewal, loan workout or as a part of the usual and customary real estate review process that monitors the risks associated with the Bank’s loan portfolios. 41 The following table sets forth certain information at September 30, 2025, regarding the dollar amount of loans in the Company’s portfolio based on their contractual terms to maturity. Demand loans, loans having no schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s). Maturing within one year After one but within five years After five but within fifteen years After fifteen years Total Residential real estate $ 11,038 $ 17,408 $ 84,560 $ 337,001 $ 450,007 Home equity 1,839 211 10,808 38,955 51,813 Commercial real estate 46,382 146,511 371,043 622 564,558 Construction and land development 30,436 6,285 32,949 10,008 79,678 Multifamily 39,071 51,769 101,858 - 192,698 Commercial business 44,449 33,710 18,010 23 96,192 Consumer 100 248 - - 348 Manufactured homes 2 125 10,647 13,598 24,372 Government 3,732 7,489 1,077 - 12,298 Total loans receivable $ 177,049 $ 263,756 $ 630,952 $ 400,207 $ 1,471,964 The Company is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Company will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. During the nine months ended September 30, 2025, the Company originated $29.3 million in new fixed rate mortgage loans for sale, compared to $22.5 million during the nine months ended September 30, 2024. Net gains realized from the mortgage loan sales totaled $873 thousand for the nine months ended September 30, 2025, compared to $810 thousand for the nine months ended September 30, 2024. At September 30, 2025, the Company had $2.6 million in loans that were classified as held for sale, compared to $1.3 million at December 31, 2024. Asset Quality Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on nonaccrual status. The Company will at times maintain certain loans on accrual status, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in the process of being received. The Company's non-performing loans are summarized below: (Dollars in thousands) Loan Segment September 30, 2025 December 31, 2024 Residential real estate $ 5,814 $ 4,665 Home equity 881 483 Commercial real estate 2,064 1,280 Construction and land development 717 658 Multifamily 1,732 3,362 Commercial business 2,684 3,290 Total $ 13,892 $ 13,738 Non-performing loans to total loans 0.94 % 0.91 % Non-performing loans to total assets 0.68 % 0.67 % 42 Substandard loans include potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms. No loans were internally classified as doubtful or loss at September 30, 2025 or December 31, 2024. The Company's substandard loans are summarized below: (Dollars in thousands) Loan Segment September 30, 2025 December 31, 2024 Residential real estate $ 5,898 $ 4,754 Home equity 887 490 Commercial real estate 2,064 1,598 Construction and land development 2,307 2,285 Multifamily 1,732 3,550 Commercial business 2,684 3,290 Manufactured homes - 54 Total $ 15,572 $ 16,021 In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard. The Company's special mention loans are summarized below: (Dollars in thousands) Loan Segment September 30, 2025 December 31, 2024 Residential real estate $ 5,132 $ 4,291 Home equity 460 459 Commercial real estate 18,080 8,008 Construction and land development - 3,675 Multifamily 2,809 5,329 Commercial business 1,760 3,528 Manufactured homes 90 - Total $ 28,331 $ 25,290 At September 30, 2025, management is of the opinion that there are no loans where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due or nonaccrual. Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources. The allowance for credit losses (ACL) is a valuation allowance for expected losses over the estimated life of loan portfolio, increased by the provision for credit losses, and decreased by charge-offs net of recoveries. A loan is charged off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. The determination of the amounts of the ACL and provisions for credit losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability and reasonable and supportable forecasts as of the reporting date. The appropriateness of the current period provision and the overall adequacy of the ACL are determined through a disciplined and consistently applied quarterly process that reviews the Company’s current credit risk within the loan portfolio and identifies the required allowance for credit losses given the current risk estimates. 43 The Company's provision for (benefit from) credit losses for the period ended are summarized below: (Dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, Loan Segment 2025 2024 2025 2024 Residential real estate $ (22) $ 170 $ (1,783) $ 462 Home equity (56) 107 (153) 136 Commercial real estate 86 (622) 2,788 (766) Construction and land development (345) (261) (1,501) (1,400) Multifamily 226 650 1,560 631 Commercial business 141 (179) 160 369 Consumer 9 16 26 51 Manufactured homes (9) 90 (136) 66 Government 31 28 (9) 53 Total $ 61 $ - $ 952 $ (397) The Company's charge-off and recovery information is summarized below: (Dollars in thousands) Three Months Ended September 30, 2025 Loan Segment Charge-offs Recoveries Net (Charge-offs) Recoveries Residential real estate $ - $ 15 $ 15 Multifamily - 1 1 Commercial business (276) - (276) Consumer (14) 6 (8) Total $ (290) $ 22 $ (268) (Dollars in thousands) Three Months Ended September 30, 2024 Loan Segment Charge-offs Recoveries Net (Charge-offs) Recoveries Residential real estate $ (28) $ 9 $ (19) Commercial real estate - 1 1 Commercial business (2) 222 220 Consumer (17) 1 (16) Total $ (47) $ 233 $ 186 (Dollars in thousands) Nine Months Ended September 30, 2025 Loan Segment Charge-offs Recoveries Net (Charge-offs) Recoveries Residential real estate $ - $ 50 $ 50 Commercial real estate - 4 4 Multifamily (46) 11 (35) Commercial business (337) 460 123 Consumer (35) 7 (28) Total $ (418) $ 532 $ 114 44 (Dollars in thousands) Nine Months Ended September 30, 2024 Loan Segment Charge-offs Recoveries Net (Charge-offs) Recoveries Residential real estate $ (28) $ 30 $ 2 Commercial real estate - 3 3 Multifamily (66) 31 (35) Commercial business (2) 230 228 Consumer (60) 7 (53) Total $ (156) $ 301 $ 145 The ACL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix, and local economic conditions. In determining the provision for credit losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality. The Company's allowance to total loans and non-performing loans are summarized below: (Dollars in thousands) September 30, 2025 December 31, 2024 Allowance for credit losses $ 17,977 $ 16,911 Total loans $ 1,473,774 $ 1,508,976 Non-performing loans $ 13,892 $ 13,738 ACL-to-total loans 1.22 % 1.12 % ACL-to-non-performing loans (coverage ratio) 129.4 % 123.1 % Investment Portfolio The primary objective of the Company’s investment portfolio is to provide for the liquidity needs of the Company and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. government securities, U.S. treasury securities, federal agency obligations, obligations of state and local municipalities, mortgage-backed securities, and corporate securities. The securities portfolio, all of which is designated as available-for-sale, totaled $335.2 million at September 30, 2025, compared to $333.6 million at December 31, 2024, an increase of $1.6 million (0.5%). The increase in securities available for sale from year end, was primarily due to an increase in the fair value of the overall portfolio. The yield on the securities portfolio was 2.40% for the nine months ended September 30, 2025 and 2.39% for the nine months ended September 30, 2024. Management did not execute any securities sale transactions during the quarter. At September 30, 2025, the securities portfolio represented 17.6% of interest-earning assets and 16.3% of total assets compared to 17.5% of interest-earning assets and 16.2% of total assets at December 31, 2024. The Company’s end-of-period investment portfolio and other short-term investments and stock balances were as follows: September 30, 2025 December 31, 2024 (Dollars in thousands) Balance % Securities Balance % Securities U.S. government sponsored entities $ 8,386 2.5 % $ 8,061 2.4 % Collateralized mortgage obligations and residential mortgage-backed securities 106,293 31.7 % 109,325 32.8 % Municipal securities 218,855 65.3 % 214,749 64.4 % Collateralized debt obligations 1,616 0.5 % 1,419 0.4 % Total securities available-for-sale $ 335,150 100.0 % $ 333,554 100.0 % 45 (Dollars in thousands) September 30, 2025 December 31, 2024 $ Change % Change Interest bearing deposits in other financial institutions $ 84,157 $ 52,047 $ 32,110 61.7 % Fed funds sold 563 654 (91) (13.9 %) Federal Home Loan Bank stock 6,547 6,547 - - The increase in interest bearing deposits in other financial institutions is the result of the timing of loan fundings and payoffs, inflow and outflow of deposits, repurchase agreements and borrowed funds. The contractual maturities and weighted average yields for the U.S. government agency securities, municipal securities, and collateralized debt obligations at September 30, 2025, are summarized in the table below. Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are shown separately. The carrying values are stated in thousands (000’s). The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields presented are not on a tax-equivalent basis. Within 1 Year 1 - 5 Years 5 - 10 Years After 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount U.S. government sponsored entities $ - — % $ 8,386 1.00 % $ - — % $ - — % $ 8,386 Collateralized mortgage obligations and residential mortgage-backed securities - — % - — % - — % 106,293 1.55 % 106,293 Municipal securities - — % 3,541 2.41 % 46,151 3.12 % 169,163 3.00 % 218,855 Collateralized debt obligations - — % - — % - — % 1,616 3.33 % 1,616 Totals $ - — % $ 11,927 1.42 % $ 46,151 3.12 % $ 277,072 2.45 % $ 335,150 Deposits Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Company offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships. The Company’s end-of-period deposit portfolio balances were as follows: (Dollars in thousands) September 30, 2025 December 31, 2024 $ Change % Change Checking $ 579,760 $ 591,487 $ (11,727) (2.0 %) Savings 257,058 275,121 (18,063) (6.6 %) Money market 377,155 333,705 43,450 13.0 % Certificates of deposit 536,673 560,253 (23,580) (4.2 %) Total deposits $ 1,750,646 $ 1,760,566 $ (9,920) (0.6 %) As of September 30, 2025, deposits totaled $1.8 billion, a decrease of $9.9 million or 0.6% compared to December 31, 2024. Core deposits totaled $1.2 billion at September 30, 2025 compared to $1.2 billion on December 31, 2024. Core deposits include checking, savings, and money market accounts and represented 69.3% of the Company’s total deposits at September 30, 2025. On September 30, 2025, balances for certificates of deposit totaled $536.7 million, compared to $560.3 million on December 31, 2024, a decrease of $23.6 million or 4.2%. The decrease in deposits is primarily related to a reduction in depositor certificate of deposit activity and planned adjustments to deposit pricing. Checking account balances decreased $11.7 million and interest bearing savings account balances decreased $18.1 million from year end primarily due to decreases in personal statement savings account balances. Money market account balances increased by $43.5 million from year end due to business and retail consumer preferences. Certificates of deposits decreased by $23.6 million primarily reflecting customer prioritization of more liquid deposit products. We strive to maintain balances of personal and business checking and savings accounts through our focus on quality customer service, 46 the desire of customers to deal with a local bank, the convenience of our branch network and the breadth and depth of our product line. Non-interest bearing demand accounts comprised 16.0% of total deposits at September 30, 2025 and 15.0% of total deposits at December 31, 2024. Interest bearing demand accounts, including money market and savings accounts, comprised 53.2% of total deposits at both September 30, 2025 and December 31, 2024. Time accounts as a percentage of total deposits were 30.7% at September 30, 2025 and 31.8% at December 31, 2024. The following table presents the average daily amount of deposits and average rates paid on such deposits for the periods indicated. The amounts are stated in thousands (000’s). Nine Months Ended September 30, 2025 2024 Amount Rate % Amount Rate % Non-interest bearing demand deposits 281,016 - % $ 291,161 - % Interest bearing demand deposits 311,571 0.74 % 314,374 0.91 % MMDA accounts 353,462 3.03 % 320,777 3.39 % Savings accounts 269,282 0.05 % 292,812 0.05 % Certificates of deposit 542,390 3.44 % 536,719 3.96 % Total deposits $ 1,757,721 2.15 % $ 1,755,843 2.40 % Deposit rates decreased in the three and nine months ended September 30, 2025 compared to same periods in 2024, primarily driven by a decrease in short-term market interest rates. Borrowed Funds The Company’s borrowed funds are primarily used to fund asset growth not supported by deposit generation. The Company’s end-of-period borrowing balances were as follows: (Dollars in thousands) September 30, 2025 December 31, 2024 $ Change % Change Repurchase agreements $ 48,426 $ 40,116 $ 8,310 20.7 % Borrowed funds 55,000 65,000 (10,000) (15.4 %) Total borrowed funds $ 103,426 $ 105,116 $ (1,690) (1.6 %) Borrowings and repurchase agreements totaled $103.4 million at September 30, 2025 compared to $105.1 million at December 31, 2024, a decrease of $1.7 million or 1.6%. The decrease in borrowings from December 31, 2024, was the result of the maturity of FHLB advances partially offset by additional repurchase agreement activity. As of September 30, 2025, 72% of our deposits are fully FDIC insured, and another 8% are further backed by the Indiana Public Deposit Insurance Fund. The Company’s liquidity position remains strong with solid core deposit customer relationships, excess cash, debt securities, and access to diversified borrowing sources. As of September 30, 2025, the Company had available liquidity of $737.1 million including borrowing capacity from the FHLB and Federal Reserve facilities. Other assets totaled $37.8 million at September 30, 2025, compared to $43.9 million at December 31, 2024. The decrease in other assets is primarily related to decreased fair value of the Company’s interest rate swap contract derivative and a reduction in the deferred tax asset. Accrued expenses and other liabilities totaled $33.2 million at September 30, 2025, compared to $43.6 million at December 31, 2024. The decrease in accrued expenses and other liabilities is primarily the result of the decreased fair value of the Company's interest rate swap contract derivative, along with other activities such as a decrease in other collateral balances and ACH prefunding balances. 47 Market Risk and Interest Rate Sensitivity General Market risk represents the risk of loss due to changes in market values of assets and liabilities. The Company incurs market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. As of September 30, 2025, the Company has identified interest rate risk as our primary source of market risk. Interest Rate Risk Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk). The Company’s Board of Directors establishes broad policy limits with respect to interest rate risk. As part of this policy, the Asset Liability Committee, or ALCO, establishes specific operating guidelines within the parameters of the Board of Director’s policies. In general, the ALCO focuses on ensuring a stable and steadily increasing flow of net interest income through managing the size and mix of the balance sheet. The management of interest rate risk is an active process which encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints. An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin. Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk. Evaluation of Interest Rate Risk We use income simulations, an analysis of core funding utilization, and economic value of equity (EVE) simulations as our primary tools in measuring and managing interest rate risk. These tools are utilized to quantify the potential earnings impact of changing interest rates over a 12-month simulation horizon (income simulations) as well as identify expected earnings trends given longer term rate cycles (long term simulations, core funding utilizations, and EVE simulation). A standard gap report and funding matrix will also be utilized to provide supporting detailed information on the expected timing of cashflow and repricing opportunities. There are an infinite number of potential interest rate scenarios, each of which can be accompanied by differing economic, political, and regulatory climates; can generate multiple differing behavior patterns by markets, borrowers, depositors, and other market participants; and can last for varying degrees of time. Therefore, by definition, interest rate risk sensitivity cannot be predicted with certainty. Accordingly, the Company’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between theoretical and practical scenarios; especially given the primary objective of the Company’s overall asset/liability management process is to facilitate meaningful strategy development and implementation. Therefore, we model a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios, the collective impact of which will enable the Company to clearly understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined. 48 We utilize a simulation model as our primary tool to assess the direction and magnitude of variations in net interest income and EVE resulting from potential changes in market interest rates. Key assumptions in the model, which we believe are reasonable but which may have a significant impact on results, include: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. We forecast the next twelve months of net interest income under an assumed environment of gradual changes in market interest rates under various scenarios. The resulting change in net interest income is an indication of the sensitivity of our earnings to directional changes in market interest rates. The simulation also measures the change in EVE, or the net present value of our assets and liabilities, under an immediate shift, or shock, in interest rates under various scenarios, as calculated by discounting the estimated future cash flows using market-based discount rates. The following table shows the impact of changes in interest rates on net interest income over the next twelve months and EVE based on our balance sheet as of September 30, 2025 (dollars in millions): Interest Rate Scenario EVE* Percent Change Net interest income Percent Change +400 Bps $ 229 -33.3 % $ 62.4 -1.5 % +300 Bps $ 272 -20.5 % $ 63.6 0.4 % +200 Bps $ 312 -9.0 % $ 64.1 1.3 % +100 Bps $ 334 -2.4 % $ 63.9 1.0 % No change $ 343 0.0 % $ 63.3 0.0 % -100 Bps $ 334 -2.5 % $ 62.9 -0.7 % -200 Bps $ 315 -8.1 % $ 62.2 -1.8 % -300 Bps $ 284 -17.2 % $ 62.7 -1.0 % -400 Bps $ 236 -31.1 % $ 62.2 -1.8 % * Economic Value of Equity ("EVE") at Risk If interest rates across the yield curve were to uniformly decrease, this analysis suggests the Bank may be positioned for relatively neutral to modestly negative changes in net interest income over the next twelve months. If interest rates across the yield curve were to uniformly increase by approximately 100 to 300 basis points, this analysis suggests we would experience positive impact to net interest income over the next twelve months. If interest rates across the yield curve were to uniformly increase by a more material amount (400 basis points and above), the analysis suggests we would shift into experiencing negative impacts to net interest income over the next twelve months. We also forecast the impact of immediate and parallel interest rate shocks on net interest income under various scenarios to measure the sensitivity of our earnings under extreme conditions. In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables, including: the growth, composition and absolute levels of loans, deposits, and other earning assets and interest-bearing liabilities; economic and competitive conditions; potential changes in lending, investing and deposit gathering strategies; and client preferences. Liquidity and Capital Resources For the Company, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, we seek to manage funds so that future profits will not be significantly impacted as funding costs increase. We seek to maintain diversified sources of liquidity that may be used during the ordinary course of business as well as on a contingency basis. Our primary sources of liquidity are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities, and sales of securities, subject to market conditions. While maturities and scheduled amortization of loans and securities are predictable sources of liquidity, deposit flows and loan and securities prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are unencumbered cash and due from banks and unpledged securities classified as available for sale, which could be liquidated, subject to market 49 conditions. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and share repurchases in which we may engage. For the next twelve months, we believe that our existing cash resources will be sufficient to meet the liquidity and capital requirements of our operations. Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in other financial institutions, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Company utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds. Although customer deposits remain our preferred funding source, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLB. At September 30, 2025, we had five outstanding advances totaling $55 million and the ability to borrow up to $436.0 million from the FHLB. We also have the ability to borrow from the Federal Reserve Bank of Chicago. At September 30, 2025, we had no outstanding balance from the Federal Reserve Bank of Chicago. At September 30, 2025, cash and cash equivalents were $104.2 million and secured borrowing capacity at the Federal Reserve Bank totaled $260.2 million, providing total additional liquidity sources of $737.1 million (excluding brokered deposit capacity). The following table shows the Company’s sources of liquidity as of September 30, 2025 and December 31, 2024: Sources of Liquidity As of September 30, 2025 As of December 31, 2024 Outstanding Additional Capacity Outstanding Additional Capacity FHLB Advances $ 55,000 $ 435,962 $ 65,000 $ 459,648 Fed Discount Window - 260,182 - 186,788 Fed Funds Lines - 16,000 - 16,000 Other Line of Credit - 25,000 - 25,000 Total $ 55,000 $ 737,144 $ 65,000 $ 687,436 During the nine months ended September 30, 2025, cash and cash equivalents increased by $33.6 million compared to a $14.4 million decrease for the nine months ended September 30, 2024. The primary sources of cash and cash equivalents were sales of loans originated for sale and the net change in loans receivable. The primary uses of cash and cash equivalents were loan originations and the net change in accrued expenses and other liabilities. Cash provided by operating activities totaled $2.2 million for the nine months ended September 30, 2025, compared to cash used of $1.0 million for the nine months ended September 30, 2024. Cash used in operating activities was primarily a result of net income and sale of loans originated for sale offset by loans originated for sale and net change in accrued expenses and other liabilities. Cash provided by investing activities totaled $44.2 million for the current period, compared to cash provided in investing activities of $43.0 million for the nine months ended September 30, 2024. Cash provided by investing activities for the current nine-month period was primarily related to net change in loans receivable and proceeds from maturities of securities. Cash used in financing activities totaled $12.8 million during the current period compared to net cash used in financing activities of $56.3 million for the nine months ended September 30, 2024. The net cash used in financing activities was primarily the result of net change in deposits offset by the change in repurchase agreements. On a cash basis, the Company paid dividends on common stock of $1.0 million for the nine months ended September 30, 2025, and $1.6 million for the nine months ended September 30, 2024. At September 30, 2025, outstanding commitments to fund loans totaled $269.5 million. Approximately 60.9% of the commitments were at variable rates. Standby letters of credit, which are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party, totaled $15.1 million at September 30, 2025. Management believes that the Company has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity. Management strongly believes that maintaining a high level of capital enhances safety and soundness. During the nine months ended September 30, 2025, stockholders' equity increased by $14.1 million 9.3%. During the nine months ended September 30, 2025, stockholders’ equity was primarily increased by net income of $6.1 million and other comprehensive income as the result of market value changes within the securities portfolio of $8.8 million offset by dividends declared of 50 $1.0 million. On April 24, 2014, the Company’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Company’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. No shares were repurchased under the program during the first nine months of 2025 or 2024. During 2025, 17,253 restricted stock shares vested under the Incentive Plan outlined in Note 10 of the condensed consolidated financial statements, of which 5,328 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees. The repurchase of these surrendered shares is considered outside of the scope of the formal board approved stock repurchase program. The Bank is subject to risk-based capital guidelines adopted by the FDIC. The regulations divide capital into multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders’ equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for credit losses, less applicable regulatory adjustments and deductions. Pursuant to the above capital regulations, the Bank is required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%. In addition, the capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%. In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $3 billion in consolidated assets, such as the Company, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases. During the nine months ended September 30, 2025, the Company’s and Bank’s risk weighted assets continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations. The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk-based asset weightings are required. The Company currently holds pooled collateralized debt obligations with a cost basis of $2.1 million. These investments currently have ratings that are below investment grade. As a result, approximately $1.6 million of risk-based assets are generated by the collateralized debt obligations in the Company’s and Bank’s total risk based capital calculation. In addition, the following table shows that, at September 30, 2025 and December 31, 2024, the Bank’s capital exceeded all applicable regulatory capital requirements as set forth in 12 C.F.R. § 324. (Dollars in thousands) Actual Minimum Required For Capital Adequacy Purposes Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations September 30, 2025 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 184,560 11.49 % $ 72,261 4.50 % $ 104,376 6.50 % Tier 1 capital to risk-weighted assets $ 184,560 11.49 % $ 96,348 6.00 % $ 128,463 8.00 % Total capital to risk-weighted assets $ 204,202 12.72 % $ 128,463 8.00 % $ 160,579 10.00 % Tier 1 leverage ratio $ 184,560 8.77 % $ 84,146 4.00 % $ 105,182 5.00 % 51 (Dollars in thousands) Actual Minimum Required For Capital Adequacy Purposes Minimum Required To Be Well Capitalized Under Prompt Corrective Action Regulations December 31, 2024 Amount Ratio Amount Ratio Amount Ratio Common equity tier 1 capital to risk-weighted assets $ 179,625 11.26 % $ 71,771 4.50 % $ 103,670 6.50 % Tier 1 capital to risk-weighted assets $ 179,625 11.26 % $ 95,695 6.00 % $ 127,594 8.00 % Total capital to risk-weighted assets $ 194,499 12.19 % $ 127,594 8.00 % $ 159,492 10.00 % Tier 1 leverage ratio $ 179,625 8.47 % $ 84,854 4.00 % $ 106,068 5.00 % The Company’s ability to pay dividends to its shareholders is largely dependent upon the Bank’s ability to pay dividends to the Company. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. In addition, under the terms of the MOU, the Bank must seek regulatory approval prior to paying cash dividends. See “– Recent Developments Regarding the Company and the Bank – Memorandum of Understanding” above. Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank. Assuming receipt of regulatory approval for all cash dividends declared by the Bank under the terms of the MOU, the aggregate amount of dividends that the Bank is eligible to declare in 2025, without the need for qualifying for a further exemption or prior DFI approval under the terms of Indiana law described above, is its 2025 net income. On August 15, 2025, the Board of Directors of the Company declared the most recent quarterly dividend of $0.12 per share. The Company’s quarterly dividend was paid to shareholders on September 12, 2025 to shareholders of record on August 29, 2025. Results of Operations - Comparison of the Three Months Ended September 30, 2025 and September 30, 2024 For the quarter ended September 30, 2025, the Company reported net income of $3.5 million, compared to net income of $606 thousand for the quarter ended September 30, 2024, an increase of $2.9 million. For the quarter ended September 30, 2025, the ROA was 0.68%, compared to 0.12 % for the quarter ended September 30, 2024. The ROE was 8.96% for the quarter ended September 30, 2025, compared to 1.60% for the quarter ended September 30, 2024. Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates. Average balances are derived from daily balances. 52 Quarter Ended (Dollars in thousands) Average Balances, Interest, and Rates (unaudited) September 30, 2025 September 30, 2024 Average Balance Interest Rate (%) Average Balance Interest Rate (%) ASSETS Interest bearing deposits in other financial institutions $ 90,880 $ 991 4.36 % $ 54,084 $ 665 4.92 % Federal funds sold 1,285 12 3.74 % 682 9 5.28 % Securities available-for-sale 327,030 1,965 2.40 % 342,451 2,031 2.37 % Loans receivable 1,474,324 20,246 5.49 % 1,506,967 19,660 5.22 % Federal Home Loan Bank stock 6,547 126 7.70 % 6,547 107 6.54 % Total interest earning assets 1,900,066 $ 23,340 4.91 % 1,910,731 $ 22,472 4.70 % Cash and non-interest bearing deposits in other financial institutions 24,882 22,478 Allowance for credit losses (18,243) (18,482) Other non-interest bearing assets 152,135 155,997 Total assets $ 2,058,840 $ 2,070,724 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits $ 1,478,543 $ 7,996 2.16 % $ 1,451,414 $ 8,946 2.47 % Repurchase agreements 46,498 392 3.37 % 43,074 435 4.04 % Borrowed funds 55,904 509 3.64 % 95,224 1,085 4.56 % Total interest bearing liabilities 1,580,945 $ 8,897 2.25 % 1,589,712 $ 10,466 2.63 % Non-interest bearing deposits 285,347 287,507 Other non-interest bearing liabilities 36,397 41,696 Total liabilities 1,902,689 1,918,915 Total stockholders' equity 156,151 151,809 Total liabilities and stockholders' equity $ 2,058,840 $ 2,070,724 Net interest income $ 14,443 $ 12,006 Return on average assets 0.68 % 0.12 % Return on average equity 8.96 % 1.60 % Net interest margin (average earning assets) 3.04 % 2.51 % Net interest margin (average earning assets) - tax equivalent 3.18 % 2.66 % Net interest spread 2.66 % 2.07 % Ratio of interest-earning assets to interest-bearing liabilities 1.20x 1.20x Net interest income for the quarter ended September 30, 2025, was $14.4 million, an increase of $2.4 million (20.3%), compared to $12.0 million for the quarter ended September 30, 2024. The weighted-average yield on interest-earning assets was 4.91% for the quarter September 30, 2025, compared to 4.70% for the quarter ended September 30, 2024. The weighted-average cost of interest-bearing liabilities for the quarter ended September 30, 2025, was 2.25% compared to 2.63% for the quarter ended September 30, 2024. The impact of the 4.91% return on interest-earning assets and the 2.25% cost of interest-bearing liabilities resulted in an interest rate spread of 2.66% for the current quarter, an increase from the 2.07% spread for the quarter ended September 30, 2024. On a tax adjusted basis, the Company’s net interest margin was 3.18% for the quarter ended September 30, 2025, compared to 2.66% for the quarter ended September 30, 2024. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Net interest margin on a tax-equivalent basis represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures. 53 (Dollars in thousands) Quarter Ended, (unaudited) September 30, 2025 September 30, 2024 Calculation of net interest margin, tax-equivalent basis Net interest income $ 14,443 $ 12,006 Tax-equivalent adjustment on securities and loans 663 678 Net interest income (tax-equivalent basis) $ 15,106 $ 12,684 Total average earning assets $ 1,900,066 $ 1,910,731 Net interest margin (tax-equivalent basis) 3.18 % 2.66 % The increased net interest income and net interest margin for the quarter ended September 30, 2025, was primarily the result of reduced deposit and borrowing costs as a result of the Federal Reserve reduction of federal funds rates year over year and increased loan yields as commercial loans mature and/or reprice. The following table shows the change in non-interest income for the quarter ending September 30, 2025, and September 30, 2024. (Dollars in thousands) Three Months Ended September 30, 9/30/2025 vs. 9/30/2024 2025 2024 $ Change % Change Non-interest income: Fees and service charges $ 1,463 $ 1,463 $ - - % Wealth management operations 759 731 28 3.8 % Gain (loss) on tax credit investment 23 - 23 NM Gain (loss) on sale of loans held-for-sale, net 265 338 (73) (21.6) % Increase in cash value of bank owned life insurance 210 205 5 2.4 % Gain (loss) on sale of real estate (56) - (56) NM Other 249 130 119 91.5 % Total non-interest income $ 2,913 $ 2,867 $ 46 1.6 % The increase in non-interest income during the quarter ended September 30, 2025 compared to the same period in 2024 was primarily the result of higher other income related to an individual BOLI claim benefit partially offset by decreased gains on sale of loans. The following table shows the change in non-interest expense for the three months ending September 30, 2025 and September 30, 2024. (Dollars in thousands) Three Months Ended September 30, 9/30/2025 vs. 9/30/2024 2025 2024 $ Change % Change Non-interest expense: Compensation and benefits $ 7,330 $ 6,963 $ 367 5.3 % Occupancy and equipment 2,004 2,181 (177) (8.1) % Data processing 1,116 1,165 (49) (4.2) % Marketing 257 209 48 23.0 % Federal deposit insurance premiums 399 435 (36) (8.3) % Professional and outside services 945 1,251 (306) (24.5) % Technology 549 602 (53) (8.8) % Other 1,497 1,668 (171) (10.3) % Total non-interest expense $ 14,097 $ 14,474 $ (377) (2.6) % 54 Decreases in non-interest expenses during the quarter ended September 30, 2025 were primarily attributable to lower occupancy and equipment expenses relating to reduced depreciation of our fixed assets, lower professional and outside services fees relating to implementation of the corrective actions set forth in the Consent Order, and lower other expenses relating to reduced core deposit intangible amortization from prior acquisitions. These decreases were partially offset by higher compensation and benefits expense, driven by annual merit-based increases and other refinements in roles and responsibilities within the organization. The expense for income taxes was $63 thousand for the quarter ended September 30, 2025, as compared to the benefit of $207 thousand for the quarter ended September 30, 2024. The effective tax rate was 1.8% for the quarter ended September 30, 2025 as compared to negative 51.9% for the quarter ended September 30, 2024. The Company’s higher current effective tax rate for the quarter ended September 30, 2025, is primarily a result of updated projected earnings levels used in estimating full year 2025 tax accrual. Results of Operations - Comparison of the Nine Months Ended September 30, 2025 to September 30, 2024 For the nine months ended September 30, 2025, the Company reported net income of $6.1 million, a decrease of $3.9 million (39.1%) compared to $10.0 million for the nine months ended September 30, 2024. For the nine months ended September 30, 2025, the ROA was 0.40%, compared to 0.64% for the nine months ended September 30, 2024. The ROE was 5.27% for the nine months ended September 30, 2025, compared to 4.50% for the nine months ended September 30, 2024. Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table. Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities derives the disclosed rates. Average balances are derived from daily balances. 55 Year-to-Date (Dollars in thousands) Average Balances, Interest, and Rates (unaudited) September 30, 2025 September 30, 2024 Average Balance Interest Rate (%) Average Balance Interest Rate (%) ASSETS ` Interest bearing deposits in other financial institutions $ 67,530 2,145 4.24 % $ 61,107 $ 2,317 5.06 % Federal funds sold 1,176 33 3.74 % 919 29 4.21 % Securities available-for-sale 330,286 5,942 2.40 % 348,269 6,239 2.39 % Loans receivable 1,486,392 59,841 5.37 % 1,504,197 57,713 5.12 % Federal Home Loan Bank stock 6,547 390 7.94 % 6,547 285 5.80 % Total interest earning assets 1,891,931 68,351 4.82 % 1,921,039 $ 66,583 4.62 % Cash and non-interest bearing deposits in other financial institutions 26,653 19,598 Allowance for credit losses (17,744) (18,670) Other non-interest bearing assets 152,719 155,433 Total assets $ 2,053,559 $ 2,077,400 LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits $ 1,476,705 23,821 2.15 % $ 1,464,682 $ 26,350 2.40 % Repurchase agreements 44,194 1,110 3.35 % 40,879 1,204 3.93 % Borrowed funds 58,817 1,719 3.90 % 90,423 3,189 4.70 % Total interest bearing liabilities 1,579,716 26,650 2.25 % 1,595,984 $ 30,743 2.57 % Non-interest bearing deposits 281,016 291,161 Other non-interest bearing liabilities 38,307 41,540 Total liabilities 1,899,039 1,928,685 Total stockholders' equity 154,520 148,715 Total liabilities and stockholders' equity $ 2,053,559 $ 2,077,400 Net interest income 41,701 $ 35,840 Return on average assets 0.40 % 0.64 % Return on average equity 5.27 % 4.50 % Net interest margin (average earning assets) 2.94 % 2.49 % Net interest margin (average earning assets) - tax equivalent 3.08 % 2.63 % Net interest spread 2.57 % 2.05 % Ratio of interest-earning assets to interest-bearing liabilities 1.20x 1.20x Net interest income for the nine months ended September 30, 2025, was $41.7 million, an increase of $5.9 million (16.4%), compared to $35.8 million for the nine months ended September 30, 2024. The weighted-average yield on interest-earning assets was 4.82% for the nine months ended September 30, 2025 compared to 4.62% for the nine months ended September 30, 2024. The weighted-average cost of interest-bearing liabilities for the nine months ended September 30, 2025, was 2.25% compared to 2.57% for the nine months ended September 30, 2024. The impact of the 4.82% return on interest-earning assets and the 2.25% cost of interest-bearing liabilities resulted in an interest rate spread of 2.57% for the nine months ended September 30, 2025, an increase from the 2.05% spread for the nine months ended September 30, 2024. The Company’s net interest margin on a tax-equivalent basis was 3.08% for the nine months ended September 30, 2025, compared to 2.63% for the nine months ended September 30, 2024. The Company believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons. Tax adjusted net interest margin represents a non-GAAP financial measure. See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures” for further disclosure regarding non-GAAP financial measures. 56 Nine Months Ended September 30, (Dollars in thousands) 2025 2024 Calculation of net interest margin, tax-equivalent basis Net interest income $ 41,701 $ 35,840 Tax-equivalent adjustment on securities and loans 2,007 2,054 Net interest income (tax-equivalent basis) $ 43,708 $ 37,894 Total average earning assets $ 1,891,931 $ 1,921,039 Net interest margin (tax-equivalent basis) 3.08 % 2.63 % The increased net interest income and net interest margin for the nine months ended September 30, 2025, was primarily the result of reduced deposit and borrowing costs as a result of the Federal Reserve's reduction of federal funds rates year over year and increased loan yields as commercial loans mature and/or reprice. The following table shows the change in non-interest income for the nine months ended September 30, 2025, and September 30, 2024. (Dollars in thousands) Nine Months Ended September 30, 9/30/2025 vs. 9/30/2024 2025 2024 $ Change % Change Non-interest income: Fees and service charges $ 3,902 $ 3,873 $ 29 0.7 % Wealth management operations 2,074 2,127 (53) (2.5) % Gain (loss) on tax credit investment 90 - 90 - % Gain (loss) on sale of loans held-for-sale, net 873 810 63 7.8 % Increase in cash value of bank owned life insurance 628 610 18 3.0 % Gain (loss) on sale of real estate (56) 11,873 (11,929) (100.5) % Gain (loss) on sale of securities, net - (531) 531 (100.0) % Other 314 154 160 103.9 % Total non-interest income $ 7,825 $ 18,916 $ (11,091) (58.6 %) The decrease in non-interest income was primarily caused by two special first quarter 2024 strategic initiatives involving the pre-tax non-interest income gain of approximately $11.8 million from a sale-leaseback transaction completed on February 22, 2024. The 2024 non-interest income real estate gain was also partially offset by a $531 thousand loss from the sale of $15.1 million in securities, a transaction also completed during the first quarter of 2024 to improve future profitability, deleverage the balance sheet through a reduction in borrowings outstanding, and further benefit regulatory capital ratios in subsequent periods. 57 The following table shows the change in non-interest expense for the nine months ended September 30, 2025, and September 30, 2024. (Dollars in thousands) Nine Months Ended September 30, 9/30/2025 vs. 9/30/2024 2025 2024 $ Change % Change Non-interest expense: Compensation and benefits $ 22,015 $ 21,109 $ 906 4.3 % Occupancy and equipment 6,050 6,205 (155) (2.5) % Data processing 3,496 3,470 26 0.7 % Marketing 557 579 (22) (3.8) % Federal deposit insurance premiums 1,303 1,333 (30) (2.3) % Professional and outside services 3,320 4,064 (744) (18.3) % Technology 1,548 1,734 (186) (10.7) % Other 5,066 5,401 (335) (6.2) % Total non-interest expense $ 43,355 $ 43,895 $ (540) (1.2) % Decreases in non-interest expenses during the nine months ended September 30, 2025, were primarily attributable to non-recurring professional and outside service expenses occurring during 2024 which were associated with the implementation of the corrective actions set forth in the Consent Order and sale leaseback transaction, as well as lower technology costs in 2025. This decrease in non-interest expense was primarily offset by increases in compensation and benefit expense driven by annual merit-based increases. The provision for income taxes was $189 thousand for the nine months ended September 30, 2025 as compared to the provision of $756 thousand for the nine months ended September 30, 2024. The effective tax rate was 3.0% for the nine months ended September 30, 2025, as compared to 7.0% for the nine months ended September 30, 2024. The Company’s year-to-date effective tax rate for the nine months ended September 30, 2025, decreased primarily due to a decrease in estimated full year 2025 tax accrual based on updated projected earnings levels. Critical Accounting Policies The notes to the condensed consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10–K for 2024 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Forward-Looking Statements Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Company cautions readers that forward-looking statements, including without limitation those relating to the Company’s future business prospects, merger and acquisition activities, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in the Company’s 2024 Form 10-K. Non-GAAP Financial Measures This filing includes certain financial measures that are identified as non-GAAP, including adjusted net interest income and tax adjusted net interest margin. The Company's provides these non-GAAP performance measures because they are used by management to evaluate and measure the Company’s performance, which the Company believes also is useful to assist investors in assessing the Company’s operating performance. Where non-GAAP financial measures are used in this report, the most comparable GAAP measure, as well as the reconciliation to the most comparable GAAP measure, can be found in the tables referenced herein. The adjusted net interest income and tax-adjusted net interest margin measures recognize the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using 58 the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes. Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution’s business and performance, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business operations and performance. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.